Just Afterpay it? If you buy now, you might pay later

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Buy now, pay later services such as the Afterpays and Zips of the world have had a bit of a moment over the past five or so years, not only in sharemarket terms (the former is now valued at some $40 billion), but also in popularity as shoppers flock to the seemingly attractive payment option.

If you’ve never used or heard of BNPL services, they pretty much do what they say on the tin. You can purchase a product and instead of paying the full price upfront, you split the cost into four or more instalments which you repay over time.

In essence, it’s a modern, teched-up version of the lay-by system which fuelled the purchase of many an overpriced couch back in the day – only, unlike layby, you get to take your purchase home straight away, rather than having to wait until it’s fully paid off.

Last year, 43 per cent of Australians said they’d used a BNPL service, according to Finder, slightly lower than in 2022 when only half of us had. Unsurprisingly, the biggest uptake is among younger generations, a group who are some of the hardest hit by the current cost-of-living and rental crises.

What’s the problem?

As attractive as BNPL services seem, we all know if something seems too good to be true, it probably is. BNPL services charge users late fees if payments are missed, and an increasing number of customers (10 per cent as of last year) are being slugged. They may also encourage you to spend more than you can afford, and can make accurately tracking your spending more difficult.

Furthermore, because they’re not currently considered credit products under the law, users lack the protections, checks and balances that usually come with traditional products such as credit cards. However, the government plans to introduce legislation soon to regulate the sector, so watch this space.

What you can do about it

Meanwhile, if you’re a BNPL user or thinking about becoming one, here are some things to consider:

• Know what you’re signing up for: Before opting to go down the BNPL route, look into exactly what fees and charges you could be on the hook for. For example, Afterpay’s late fees are 25 per cent of the purchase price or $68, whatever amount is less, though these change for purchases of less than $40. Zip charges a monthly account fee which is waived if you have paid your statement balance by the due date, and has a $5 late fee. Check the terms and conditions of whatever service you pick, so you don’t end up spending more than you want to.
• Don’t get hooked on debt: One of the most alluring aspects of using BNPL is spending money you may not have. A $400 jacket is much more appealing when it’s “only” $100 a fortnight. Financial educator Kate Campbell warns that people seldom use BPNL services as a one-off – even if that’s their initial intention. “The marketing of these services plays on our desire for instant gratification,” she says. “They push you into cycles of debt and encourage you to keep using them by increasing your spending limits.”
• Keep track of it: One of the most insidious aspects of using BNPL is not knowing when the next payment will come out of your account, especially when you’re using more than one. Deb Shroot, financial counsellor at Financial Counselling Australia (FCA) says this issue comes up frequently with her clients. “It’s hard to keep track of where your money is going when you have multiple accounts,” she says. “Part of the problem is the use of direct debits and not realising there won’t be enough in your account to pay for the BNPL and other bills. You may also get slugged by your bank if you overdraw on your account.” Ninety-five per cent of FCA’s financial counsellors say BNPL debts are leaving their clients worse off.
• Explore your options: If you’re using BNPL for a discretionary purchase, think carefully about whether it’s something you really need, and if you need to use BNPL to pay for it. If the only way you can afford it is to split up your payments, it may be something you can’t afford in the first place. Campbell suggests setting up a savings account and putting some money away each time you get paid that you can use to buy things you might otherwise have put on BNPL.
• Know where to go for help: If you’re in a tough financial spot, help is available. Call the National Debt Helpline on 1800 007 007 or visit ndh.org.au for free and confidential support.

Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.